Qatar Financial Centre (QFC)is a financial and business centre established by thegovernment of Qatar in 2005 to attract international financial services and multi-national corporations to grow and develop the market for financial services in theregion. QFC aims to help all QFC licensed firms generate new, and sustainable,revenue streams. It provides access to local and regional investment opportunities.Business can be transacted inside or outside Qatar, in local or foreign currency.Uniquely, this allows businesses to operate both locally and internationally. Further-more, QFC allows 100% ownership by foreign companies, and all profits can beremitted outside of Qatar.

The QFC Authority (QFCA)is responsible for the organisation’s commercial strategyand for developing relationships with the global financial community and other keyinstitutions both within and outside Qatar. One of the most important roles of QFCAis to approve and issue licenses to individuals, businesses and other entities that wishto incorporate or establish themselves in Qatar with the Centre.

BackgroundFinancial marketsRegulatory environmentEquity and fixed income fundsAlternative fundsInvestor overviewDistribution strategies and cost ofbusinessOpportunities and challengesFund dataCONTENTS5ASSET MANAGEMENT BAROMETERMENAFOREWORDBy Shashank SrivastavaCEO and Board Member of the QatarFinancial Centre Authority (QFC Authority)We are pleased to present the first edition of the annualMENAAsset Management Barometer.This inaugural edition provides a current and detailed insightinto the asset management industry across the MENA region.We hope that over time, theBarometerwill contribute toenhance the transparency of the MENA asset managementmarketplace and that it will provide participants with anadditional benchmark for decision-making.Our uniqueBarometeris based on in-depth interviews with45 senior executives from regional and international assetmanagement companies and from government investmententities operating in MENA. It offers a comprehensive pictureof current market sentiment and will track this over time. Thisfirst survey has found that asset managers across the MENAregion are united by the need for clearer regulation andbetter distribution opportunities. Interestingly, despite therecent political turmoil, managers are showing an increasingly‘risk-on’ attitude as they talk about the growth potential inlocal equity markets.TheBarometerprovides both a regional overview and adetailed country-by-country breakdown of the different assetclasses and market participants in MENA.We hope you will enjoy reading and benefit from thefindings of our firstMENA Asset Management Barometer.1. INTRODUCTION7EXECUTIVE SUMMARY1. BarometerOver 70% of MENA’s asset managers remainconfident about 2013. The majority of thisoptimism stemmed from GCC-based firms, whobelieved that the combined force of increasedgovernment investment and dynamic local equitymarkets would make the six GCC states attractiveinvestment locations.Managers outside the GCC are less positive.Egypt-based financial professionals predictedthat future growth would hinge on the country’sdelayed parliamentary elections and a returnto economic normalcy. A number ofBarometerrespondents expressed concern that the currentinstability could have a long-term drag onfinancial markets across MENA.Different geographies united around the impactof regulation, with all participants predicting thatnew rules would have a measurable effect onMENA’s asset management space. The majorityof respondents were extremely supportive ofthe region’s Shariah-compliant sector, with newregulation in Egypt, Oman and Bahrain expectedto have a positive impact on investor activity.However, managers also said that a lack ofunified regulation across MENA was damagingdistribution and investment opportunities, as wellas pushing up asset management overheads.

2. Regional overviewAll managers expressed concern that continuedpolitical unrest in MENA would hamper growthin the long-term, although a smaller numbercited change as an economic opportunity.In stark contrast to concerns about politicalfragmentation, the biggest investment trendmentioned by managers was a return to a morerisk-on environment.This was chiefly characterised by a descriptionof asset managers moving from fixed income toequities, or at least a re-weighting of portfolios toan equity parity or bias.

3. Country guidesThe lack of a uniform approach to foreignownership, direct investment and fund marketingrules was a factor that many managers foundfrustrating. However, while complex layers ofregulation frequently divided countries, a numberof MENA nations were united by their strongfundamentals – a condition thatBarometer

respondents said would make them ripe for bothincreased domestic investment and foreignallocations.Qatar and the UAE seem to be particularly well-poised.Barometerrespondents said that thecountries’ infrastructure spending programmesand successful attempts to build a relevant hubfor financial service firms would continue to

101.Confidence remains high with 70% of thosetaking part in theBarometerbelieving thatMENA’s financial markets would continue to growin 2013.Barometerrespondents said that GCCequity markets would hit a high note this year,with a number citing Q1 local investor inflows intoregional equity funds.2.Political unrest still remains the darkest cloudon the horizon. Although managers saw somedistressed opportunities in the nations hit by civilupheaval, the majority were understandablyconcerned that a ‘never-ending’ Arab Springwould have a significant impact on theirbusinesses.3.Domestic unrest is tempered by the largesseand inward investment of MENA governments.Barometerrespondents said that an increase ininfrastructure spending in MENA, but particularlythe GCC, would inject life into the markets,increase liquidity and encourage the inflow offoreign investment capital.4.

Barometerrespondents tipped local equitymarkets to outperform in 2013, while almost 50%of mutual fund managers were contemplating anew equity strategy. Shariah-compliant products– across all strategies – also remain popular,with managers expecting increased interest inthe space this year from local and internationalinvestors.5.Regulation remains both a threat (52%) andan opportunity (48%) according toBarometer

respondents. Managers across MENA were unitedby the need for a more uniform regulatory approachto the distribution and marketing of funds.6.Operational issues weigh heavily on the mindsof managers in the region – building a better ITinfrastructure and using a third-party administratorwere cited as key developments. All of this comesat a cost – 34.2% of respondents said businessexpense would increase in 2013 – but the biggestcost of 2013 (after salaries) was the prospect ofabsorbing new local and global regulation.SUMMARY OFKEY FINDINGS11MENAASSET MANAGEMENT BAROMETERContinued growth of MENA markets% of responseManagers are confident in the continued growth ofMENA financial markets70Largest negative impact on local marketsPolitical unrest38Largest positive impact on local marketsIncreased spending of local governments80What will be the best performing asset class of 2013?Equities42Top planned product/strategy launches in 2013Equity47Shariah-compliant42Source of mutual fund investment fromMENA investors68Global investors32Is regulation seen as a challenge or an opportunity?Challenge52Opportunity48Will costs increase in 2013?Stay the same55Increase34Largest operational expenseRegulation and compliance77BAROMETER INDEX12SURVEY RESULTSAsset management in the MENA region (GCC, Egypt and Morocco) sits at a critical juncture. After achallenging three years, the sector bounced back in 2012 with a run of more positive performanceand is now, according toBarometerrespondents, preparing for a period of growth.Over the course of 45 in-depth interviews with local and global asset management professionals, theBarometerfound that this future extension of MENA’s asset management industry would be determined bya combination of external economic factors, domestic demand structures, continued state involvement inlocal economies and a slowly improving and stable regulatory and supervisory environment.Barometerrespondents described 2013 as a year of consolidation where the prospect of bettermarket conditions could encourage a more ‘risk-on’ approach by managers. Third-party fundmanagers, who have struggled of late to pick up traction from both local and global investors, alsospoke of a climate of net inflows and renewed investor interest.Solid performance was expected to be bolstered by positive GDP growth, particularly in the GCC,and inflation levels that although rising, have been largely kept under control – despite the cut insome states’ fuel subsidies – by government intervention. Oil prices are expected to remain high,contributing to increased liquidity and state spending. However, there is some concern that futurefaltering demand from China and the US could start to see prices fall later in the year.“We believe investment strategies focusing on local economiesand yield will do well in 2013”Jadwa InvestmentThe largest cloud on the horizon remains the lingering political impasse of the Arab Spring. Assetmanagers cited elections in Egypt as the most significant event of 2013. However, others mentionedthat the long-term financial health of MENA hangs more on the inter-generational transition in SaudiArabia, than on the recent gyrations of post-revolutionary states.Those who responded to theBarometerexpected regional equities, after a slow start, to returndouble digits in 2013. Respondents also anticipated fixed income in the region, buoyed by new sukukproduct and regulation, to hold investor interest, despite falling yields.

Future growthThe majority of asset managers taking part in theBarometerwere positive about continued futuregrowth, expecting total assets under management (AuM) across MENA to increase over the next12 months. Respondents believed that growing domestic cash reserves would be put to work in theequity markets as a more risk-on mood begins to drive investment management decisions.

Barometer 2: Do you expect your AuM by the end of 2013 to be more or lessthan your firm’s current total?

Barometer 3: By how much will your AuM

grow over 2013?

Barometer 4: Do you expect to garner more fee

income in 2013?“We are anticipatinggrowth this year inequities, we think theequity markets havesome opportunitiesstill for our clientsand we expect themto be looking acrossa number of differentgeographies asthey expand theseinvestments”

JP MorganBroadly the same 13.2%No 5.2%Yes 81.6%“After a decade orso of rapid growth(albeit interrupted bysevere corrections)there is now furtherroom for growth inGCC equity markets.They are presentlyconsidered asfrontier markets andhave the potentialto be reclassifiedunder the emergingcategory”Securities andInvestment Company14Barometerrespondents remained realistic, but confident, about the future. Most were cognisantthat anticipated growth could be buffeted by the still challenging global macro-economic climate,particularly volatile oil prices and local political concerns – especially April 2013’s elections in Egypt.However, the majority felt that the GCC in particular remained a strong investment opportunity anda relevant place for asset management firms to establish operations.

Barometer 5: Which factors could have the largest negative impact on localmarkets in 2013?

Barometer 6: Which factors could have the largest positive impact on themarkets in 2013?

Other 4%New regulation 7%Lack of liquidity in themarkets 16%Volatile oil prices 35%Political unrest 38%Other 10%New regulation 8%A resolution of thepolitical situation inthe Middle East 16%Global rally in equities 24%Increased spending oflocal governments 42%15ASSET MANAGEMENT BAROMETERMENAWe have been able to trade the volatility 15%We have re-weighted our portfolio 20%We have lost assets 22%We have struggled to raise funds 35%It has given us strategy ideas, includingthe ability to take advantage of new regulation40%We have been forced to review riskmanagement procedures

54%

CountryAverage responseUAEOverweightOmanOverweightQatarOverweightSaudi ArabiaOverweightBahrainNeutralEgyptNeutralKuwaitUnderweightMoroccoUnderweight“We want to see moreinvestment tools beingapproved, short selling,sukuk, endowmentfunds, different kindsof derivatives and newregulations related to fundmanagement”HC Securites & InvestmentThe impact of the Arab Spring continues to challenge local and regional financial markets.However, in the short-term the GCC – in particular the UAE, Qatar and Saudi Arabia – has benefitedfrom instability in the region, by being widely perceived as a ‘safe-haven’ for assets from acrosswider-MENA. Based on unprompted responses more than 40% of theBarometer’s interviewees alsosaw trading opportunities embedded in the dislocation, particularly the ability to seek out distressedinvestments. Others cited opportunities to ride the capital flows that are currently moving to theGCC and to trade the volatility. MostBarometerrespondents remained concerned about continuedpolitical arrest, but the majority believed local markets were robust enough to recover.

Barometer 7: How has the Arab Spring impacted your business (unpromptedresponses)?Barometerrespondents described the opportunity set across the whole of MENA as uneven.According to the research, countries with an “advanced regulatory” structure, a “track record inpublic/private partnerships” and an “even political process” were most likely to attract the majorityof capital.

Barometer 8: Will your portfolio be

overweight, underweight or neutral

on the following countries in 2013?

16Equity 47.4%Shariah-compliant 42.1%Fixed income 39.5%Property 34.2%Private equity 21.1%Commodities 13.2%No new products 13.2%Hedge fund 2.6%Infrastructure 2.6%Asset classesBarometerrespondents viewed MENA equities as a good buying opportunity for emerging marketsinvestors in 2013. With GCC equities trading at an average 6% discount compared to other emergingmarkets, theBarometeralso predicted a period of growth in the same period. According to therespondents, equities are set to return between 10 and 15% with Saudi Arabia, Qatar and UAEcompanies - propelled by strong internal investment and consumption dynamics - expected to out-perform the rest of the region.

Barometer 10: What new products/strategies do you plan to launch in 2013?Equity strategies may dominate new launches in 2013, but fixed income also remained popular amongstmanagers. Despite yields being overshadowed by high predicted equity returns and the move to amore risk-on environment,Barometerrespondents said that public and private debt was becoming amainstream and popular investment vehicle in MENA. The fixed income space was also set for moredebt issuances in 2013 as well as increased investor interest in its Shariah-compliant version, sukuk.

Property 31%Fixed income 7%Commodities 20%Equities 42%“Currently there are no fixedincome or sukuk investmentinstruments in Egypt, so there ispent up demand”EFG Hermes, EgyptManagers responded positively to this trend ofde-risking - seeing it as an opportunity to improveliquidity and inject fresh money into the market.According to theBarometer, asset managersin the region are planning to launch a batch ofnew equity, fixed income and Shariah-compliantstrategies in 2013, to meet investor demand.There has also been an increased interest inalternative products, particularly property funds.

Barometer 9: What will be the bestperforming asset class in 201317ASSET MANAGEMENT BAROMETERMENADistribution trendsAs the GCC develops, increasing numbers of managers see it as serving the financial needs of therest of MENA. Cross-border relationships and more GCC-wide distribution of funds is expected to bea growing hallmark of the way that certain sectors within the MENA asset management communitysell product. Of those questioned, almost 70% spoke of establishing another regional hub, while 60%of those surveyed already had another presence within the GCC or wider-MENA. Many wanted toset up further afield – with London, New York and Singapore the most popular bases.Qatar did well among managers searching for second locations, but fell behind Saudi Arabia andthe UAE as the most popular area to set up a new office. Of the 70% who discussed establishing anew presence, the UAE proved the top location among 40% of managers, Saudi 30% and Qatar 20%.

Barometer 11: Where in MENA would you establish a new office?“There is a very interesting market opportunity, which is to developan asset management enterprise here in the Middle East”

Other 10%Qatar 20%Saudi Arabia 30%UAE 40%18“Introducing more asset classes will lead to a more diversifiedmarket. Easing the company listing / IPO regulations will increasethe depth of the market”Jadwa Investment

A number ofBarometerrespondents spoke of renewed interest from US and European institutionalinvestors. Managers who specialised in Shariah-compliant products were starting to see an uptick ininterest from Asia and Australia.Global investors 32%Local/MENA investors 68%19ASSET MANAGEMENT BAROMETERMENAThe majority of firms (61.5%) benefited from positive performance in 2012, with new investorsubscriptions and fund launches also boosting the overall assets of managers across the region.Those who saw a decline were primarily hampered by redemptions, as nervous investors retreatedinto cash. Net investor activity was positive, but only 38.5% of those who reported good performanceacross 2012 saw new investor subscriptions. A testament to a sclerotic and disjointed 12 months.

Barometer 14: What were the fund flows to your different products in 2012?Although a sea change in investor activity in 2013 certainly isn’t anticipated, there was anexpectation that allocators would begin to consider a return to equities and equity vehicles – ifmanagers could overcome scepticism about volatility and the diversity of regional equity marketsOne of theBarometer’s key sentiments was a return to a more ‘risk-on’ environment. This waschiefly characterised by a description of asset managers moving from fixed income to equities, or atleast a re-weighting of portfolios to an equity parity or even bias.“The low yield environment is really making clients think about2013 as an opportunity set where we can try to find innovativesolutions and maybe see some opportunities in the equity space”

Regulation remains both a challenge and an opportunity for asset managers. Ownership limits forforeigners and a lack of uniform regulation in the markets themselves is perceived as a weakness.However, a number of managers applauded recent attempts to streamline distribution activitiesand create space for new sukuk products.

Barometer 15: Do you see regulation as a challenge or opportunity?

The lack of a “single track” GCC was cited byBarometerrespondents as a key challenge, withseparate GCC countries possessing varying rules and regulations with respect to investment banking,asset management and the promotion of investment products.Managers who took part in theBarometercalled for more harmonisation and a greater consolidationof regulatory values. Arguing that a one-track regulatory system across the GCC, and one eventuallycovering the wider MENA-region, would make it substantively easier for asset managers to streamlinetheir own operations, control cost and focus on managing assets, rather than shifting business modelsto accommodate different national regulatory environments.“Probably one of the things to think about more long term in theGCC is a passporting scheme. It would enable local investorsto access a variety of products and global investors to see theattractiveness of the MENA region”Goldman SachsGlobal regulation remained worrisome, but keeping up with local MENA regulation was potentially themost difficult task. Shifting regulatory change in each manager’s country of operation was described asthe most pressing concern – particularly by managers in Kuwait, Egypt and Saudi Arabia.Opportunity 48%Challenge 52%21ASSET MANAGEMENT BAROMETERMENA

Barometer 16: How important are the the following to you? Would you saypotentially game changing, significant, not significant, or not sure?Infrastructure and costSolid fundamentals, improved performance, more products and an increasingly engaged investorbase have created the relevant conditions for future asset management growth. However, managerswho responded to theBarometerwere convinced that the opportunities created by improvedmarkets could not be seized without the relevant infrastructure.Possessing the right IT infrastructure was deemed ‘mission critical’ to future growth by a number ofrespondents. Although technology might be thought of as unrelated to theBarometer’s other keymission critical considerations – regulation and preparing for growth – according to respondents,possession of the relevant internal tech systems was deemed essential to both.Potentially game changing Significant Not a significant issue Not sure

16%32%41%11%FTT18%46%33%3%Regulatory change in the UAE41%46%10%3%Regulatory change in country of operation8%55%32%5%Fatca2%22%49%27%AIFMD11%18%66%5%Central clearing of derivatives2%24%61%13%Dodd-Frank8%54%33%5%Basel III18%50%32%Mifid II22

Barometer 17: How important are the following for your firm? Would they bemission critical, very important, fairly important or not important?In fact, the right infrastructure was closely linked to business success. Running better businessesand gaining investor traction by possessing a high quality operational backbone was a key factor ingrowth according toBarometerrespondents. An increasing number of managers were using outsideservice providers – whether administrators to strike the NAV or custodian services – to achieve betteroperational transparency, an area of independent oversight that investors still believe is deficient inthe region.Mission critical Very important Fairly important Not importantReliability and continuity of your IT infrastructure43%41%14%2%Preparing for growth36%46%18%Coping with current regulatory environment34%51%10%5%Bringing in new investors31%56%8%5%New regulation pipeline for 2013/1421%53%23%3%Launching new funds19%42%18%21%Managing service provider relationships3%26%55%16%Preparing to downsize3%10%13%74%Managing compensation45%52%3%Cutting operational costs at your business32%57%11%Working with institutional investment consultants26%48%26%Tax planning8%22%70%23ASSET MANAGEMENT BAROMETERMENAAdministration 65.8%Third-party research and data 55.3%IT infrastructure 31.6%Investor relations and marketing 18.4%Compliance 10.5%

Barometer 18: What outsourced services are you likely to use in 2013?Fostering the right infrastructure has made running asset management businesses increasinglyexpensive. However, managers – by and large – found paying for outsourced services a relativelyminor business expense and often a cost-effective solution.Most reported the role played by outsourced service providers to be good value for money and anecessary part of sound practice. Regulation and compliance was described as the most significantcost centre of 2013 – although many managers said they were also factoring the opportunity of moresukuk regulation and the launch of new offices and product into this overall expense.“We are looking at the ways and means that will enable us tooutsource our compliance requirements”MEFIC

Barometer 19: Beyond salaries, what will be the biggest area of cost in 2013?

Barometer 20: What was your firm’s total fee income in 2012 ($)?“A broad set of structural cost increases, many created byregulatory challenges and distribution, have pushed breakevenprices higher over recent years”HC Securities & Investment

Barometer 22: What were your total business operating costs in 2012 ($)?

The salary burden at asset management firms remains significant – over 90% of respondents citedwage bills as their number one cost centre – but in terms of headcount these divisions tend to be fleetfooted. Almost 50% operated with staff numbers of less than 30. Many of the large banks and SWFsinterviewed have considerably more employees, over 30% had more than 150 – however, a muchsmaller number of these staff were concerned with day-to-day asset management duties.

Barometer 23: How many full-time employees currently work for your organisation?>150 30.8%101-150 0.0%16-30 17.9%31-60 10.3%61-100 12.8%<5 7.7%5-15 20.5%>50Mn 6.9%21-50Mn 3.4%2-5Mn 41.4%6-10Mn 10.3%11-20Mn 10.3%<2Mn 27.6%26The majority of current staff are employed as part of the frontline portfolio management team.However, looking at future hiring plans revealed a series of different results. When asked aboutrecruitment needs in 2013, a significant number ofBarometerrespondents cited hiring plans in theircompliance, operational and legal teams. In line with a more positive mindset, a number of firms alsocited sales and marketing roles as a recruitment priority in 2013.

Barometer 24: Can you rank (with 6 being highest and 1 lowest) where youdeploy the majority of your total number of staff?Portfolioand assetmanagement5.39Operational4.42Middle and

back office3.42Legal andcompliance

2.56Sales andmarketing3.56Other1.67On the equity side we’re verypositive this year on the GCCmarket, which has a realopportunity to outperform”NBK3. REGIONAL OVERVIEW28

INTRODUCTIONStrong fundamentals underpin a growing asset management sectorWith a citizenry of over 380Mn, MENA accounts for 6% of the global population and a combinedGDP of over $2Trn. A key international energy exporter, the region plays a crucial role in the worldeconomy, while enjoying the economic benefits offered by high oil prices.Last year the combined economies of MENA’s oil producing nations surged by 5.5%. These surpluseshave enabled the region’s net energy producers – particularly the six GCC countries – to successfullyembark on long-term plans of economic growth and diversification. Systematic programmes ofinternal investment – often far-sighted multi-year plans for growth – have enabled GCC governmentsto avoid both political upheaval and the worst of the ongoing financial crisis.MENA countries (in this report, Egypt and Morocco) outside this circle – often net importers of energy –tend to possess a broader economic profile, but lower growth rates, due to a combination of state debt,lack of foreign direct investment and, for a number, the recent political upheaval of the Arab Spring.The GCC has benefited from this wider volatility.Barometerrespondents were quick to flag up the‘safe-haven’ nature of its capital markets, as well as the economic power that resides in the combinedwealth of this region’s governments, sovereign wealth funds and high-net-worth individuals.Other MENA countries are currently attempting to emulate aspects of the GCC’s recent success,with the creation of economic enterprise zones and the deployment of new financial regulation –particularly in the area of Shariah finance. With capital markets seen across the region as a key growtharea, this report sought to analyse and define the current trends in asset and fund management.“Wealth continues to grow at a rapid pace in the region given theunprecedented budget surpluses, particularly in the GCC. Thisrepresents an opportunity to capture the increasing investablecapital of individuals and institutions”NBKAs diverse politically as it is economically, MENA can be broadly separated into absolute monarchies(Saudi Arabia), monarchies with a democratic overlay (Kuwait) and fully fledged democracies(Egypt). The Arab Spring has shaken the kaleidoscope of the region’s political systems, with changesin Egypt a particularly stark example. However, change is also occurring in the GCC, with many statesconsidering a transition from strict monarchical government to a more constitutional model. Regardlessof the political system, the promotion of healthy financial markets remains a key objective of all MENAgovernments. Recent regional and global volatility have hampered this ambition by creating liquidityissues, political unpredictability and stalled investor activity – a series of overlapping factors that haveall served to slow development.However, after a better than expected 2012 – a period where financial service earnings grew by 179%during the first three quarters and with finance now accounting for over 6% of the GCC’s total GDP (Fig1) – the majority of asset managers taking part in theBarometerwere positive about continued futuregrowth, expecting AuM across a large part of MENA to increase “substantially” over the next 12 months.29REGIONAL OVERVIEWFig 1: MENA GDP breakdown 2011

The GCC’s potential for growth was particularly highly praised, with the majority ofBarometer

respondents citing its solid fundamentals and ambitious economic development plans. The regioncontinues to benefit from the current strength of hydrocarbons, a young and rising middle class,increasing GDP (Fig 2) and growing private consumer spending.

Fig 2: GDP growth ratesPositive fundamentals have been supported by governments, and their agencies, around the GCCwho have continued to increase localised spending to boost domestic opportunities in both thepublic and private sector. Although a range of inward investment has been partly compelled by theunrest of the Arab Spring, asset managers see the influx of government liquidity as driving stronger,more efficient stock markets and nurturing the GCC’s nascent fixed income industry, as more privatesector companies issue bonds (Fig 3), particularly sukuk, Shariah-compliant, debt instruments.Source: Mena FMOther activities, includingfinancial services 22%Agriculture, forestry,

fishing 5%Mining, oil, gas and

utilities 44%Transport, storage andcommunication 5%Wholesale, retail trade,restaurants and hotels 9%Manufacturing 10%Construction 5%BahrainOmanMoroccoKuwaitQatarEgyptUAESaudi Arabia2011 ($Bn)2012 ($Bn)2013 ($Bn)Source: IMF30Fig 3: Year-on-year change in local fixed income allocations20112012Arab ExpatGCC local2.8%12.4%3.9%2.5%Source: InvescoThese positive local conditions are also being driven by external forces. The inflationary pressurescreated by Western government quantitative easing programmes are expected to continue to pushup the value of equities and commodities across the GCC, leading to higher returns for managersand increasing the average size, and total number, of the region’s mutual fund vehicles (Fig 4).Over the course of 45 in-depth interviews theBarometerfound that future growth in the GCC’s assetmanagement sector would be determined by a combination of these external factors, domesticdemand structures, continued state involvement in local economies and an improved and stableregulatory and supervisory environment.Fig 4: Average mutual fund size

in particular, which have recently lagged behind their global peers, look attractive at current levelsof valuation.Trading at a 6% discount to other emerging markets, GCC equities were predicted to enjoy aperiod of growth in 2013 and, according to theBarometer, are set to return between 10 and 15% withSaudi Arabia, Qatar and the UAE poised to out-pace the rest of the region.GCC key trends – opportunities1.Signs of resurgent stock market performance. Managers expected a level of growth capable ofsignificantly boosting the GCC’s combined market cap of $750Bn and broadening local equitymarkets2. A larger fixed income market, expected to grow in size and diversity as more regular debt issuances– public and private – come to market in 2013 and 20143.A stable and competitive banking system – well capitalised, highly liquid and with supportiveshareholders4.Safe-haven status of the GCC and its likely long-term stability, particularly compared to the rest ofMENA5. A growing local familiarity with investment products and better distribution of these products6. Revived property markets, particularly in the UAE7. Islamic products driving more local, regional and global investment flows (Fig 5)8. Large state surpluses and increased state spending9. A growth in oil production and the potential for higher oil prices10.Gradually improving regulation and the portability of using the GCC as an asset management hub11.The return to a ‘risk-on’ environment with more activity from both local investors and globalallocators, who are showing an increased interest in frontier markets, particularly equities12. The development of a fully diversified institutional investor base, including a local private pensionfunds industry and existing state pensions that are becoming willing to engage with local markets

Fig 5: Conventional funds vs Shariah fundsSource: Zawya, Mena FMConventionalAUM $35BnNUMBER OF FUNDS 429ShariahAUM $20.5BnNUMBER OF FUNDS 195ShariahAUM $20.6BnNUMBER OF FUNDS 209ConventionalAUM $10.5BnNUMBER OF FUNDS 184MENA GCC32Institutional investors, according toBarometerrespondents, were also encouraged to participatein GCC markets by the ongoing growth of financial centre venues, like the Qatar Financial Centre(QFC) and the Dubai International Financial Centre (DIFC). These centres continue to nurture thecreation of a domestic fund management market and have also provided a key location forcustodial and fund administration services.Managers saw the QFC and DIFC’s specialist fund centres as being a catalyst for the rest of theregion’s asset management sector. According to theBarometerthey remain the most attractivevenue for global managers to set up both distribution and manufacturing operations.ChallengesAccording to the International Monetary Fund (IMF), growth in MENA is expected to slow to 3.6% in 2013,from 5.3% in 2012 and the 6.5% recorded in 2011. High oil prices in 2011 and 2012 allowed GCC countries towitness GDP growth, lower inflation and current account surplus.Barometerrespondents expressed concerns at a potential stagnation in oil prices, leading to a financialslowdown. However, they also pointed out that the non-oil sector remains robust and is expected to growat over 5% in the core GCC countries.GDP growth is expected to out-pace Western markets and will, according to theBarometerrespondents,hover around 4-5% for 2012/2013. Inflation has been rising, but is not expected to spiral out of control.However, despite continued growth and a clear potential, the GCC’s asset management sector is facinga number of internal and external challenges. Chiefly: the high dependence on oil, political uncertaintyin wider-MENA and the huge challenge of diversifying local economies, whilst creating the relevantinfrastructure for a vibrant capital markets business.Despite the challenges, most managers were expecting MENA to emerge from the “long Spring” asa fitter and leaner place to do business. A number even cited unexpected benefits – including Egypt’splanned Shariah-compliant financial regulation, while the majority of respondents urged a systematicapproach to risk management to negotiate the short-term uncertainty.In the midst of both market challenges and opportunities, the relative stability of the GCC was cited asthe leading contributor to flows, with a home market bias creeping into investment strategies and replacinga broader-MENA approach for a number of asset managers.Those who responded to theBarometerbacked this narrower focus, describing the opportunities currentlypresent in the GCC and the challenges, despite long-term investment opportunities, in correctly quantifyinginvestment risk in Egypt, Lebanon, Jordan and Iraq.This current divergence of regional fortunes meant asset managers across the spectrum were re-weighting portfolios to strip out uncertainty and focus on the GCC, or, in most cases, a limited basket ofGCC countries.Barometer(Q1) respondents described the opportunity set across the whole of the GCC as uneven.According to the research, countries with an “advanced regulatory” structure, a “track record in public/private partnerships” and an “even political process” were most likely to attract the majority of capital.In the same way that the ongoing Euro crisis has concentrated investors’ minds on the core and,unless distressed specialists, persuaded them to avoid the periphery, asset management firms withinthe GCC are now thinking in largely domestic terms.Saudi Arabia, Qatar and the UAE remain particularly attractive from a valuations perspective, withbanking and petrochemicals across all three – both underleveraged and offering high dividends –seen as the stocks likely to do well in 2013.33REGIONAL OVERVIEWBarometer Q1: Which countries do you see portfolio growth coming from in 2013?Saudi Arabia 70%UAE 65%Qatar 58%Oman 56%Bahrain 30%Kuwait 30%

MENA – key country asset management trends according toBarometer

respondents

1. Saudi remains the largest, most liquid, diversified and therefore attractive regional market.Barometerrespondents favoured bank and petrochemical investments. SABIC - the oldest andlargest Saudi petrochemicals company – was highly tipped by respondents2.UAE, especially Dubai, kicked off 2013 with a renewed zeal and signs of recovery in its real-estatemarket. Property development giant Emaar was seen as leading the property charge followinga positive 20123. Qatar, after seeing almost $1.5Bn of net foreign outflows over the past two years, is well placedfor a reversal of recent trends. According toBarometerrespondents it offers a number of goodopportunities despite the disappointment of not seeing the market open up for direct investments4. Kuwait remains handicapped by the prolonged political impasse5.Oman has displayed strong economic growth, but liquidity remains one of the major issues for itsstock market6. Bahrain witnessed a significant social and political outcry in the wake of the Arab Spring.Barometer

respondents believed it would take some time for investor confidence to return to the market,particularly after recent demonstrations7.Egypt, as in 2012, will remain volatile, with politically related news headlines the main driver of thelocal market, rather than fundamentals. Furthermore, delisting of assets (Mobinil, EFG, OCI) alsoincreases the risk of the country losing its MSCI emerging markets status8.Barometerrespondents called for more clarity in Morocco’s corporate transparency rules“You have toput the regioninto two camps –GCC and MENA

ex-GCC. Inthe GCC thereis much moreconfidence andwe expect nopolitical issuesin the mediumterm”NBK34Fig 6: Rationale for wider-MENA investment in GCCPolitical stability41%Other4%MENAeconomy14%Investmentopportunities11%Oil/commodityprices 10%Globaleconomy9%Businessregulation7%Governmentspending4%Source: InvescoThis flow of wider-MENA capital into the GCC, which has mostly found a home in money market funds,is expected byBarometerrespondents to continue in the short to medium term, with many expectingthese ‘safe’ inflows to take on a more ‘risk-on’ guise as investors “latch on to a new economic cycle”and show an appetite for “moving up the yield curve” and “taking on more risk”.Managers responded positively to this trend of de-risking - seeing it as an opportunity to improveliquidity and inject fresh money into the market - and are planning to launch a batch of new equity, fixedincome, Shariah-compliant and property strategies in 2013 to meet demand.Although keen to make the most of the attraction of this safe haven status, managers areconcerned that the benefits of political stability could be short term, with a reversal in flows once thepolitical situation elsewhere in MENA begins to ease. Many of the recent inflows are still held in moneymarket funds – the traditional home for short-term investments. This means that the flow of capital tothe GCC may slow over time, although economically attractive centres like Qatar, UAE and Saudiare expected to maintain momentum.Key differences in the GCC and harmonisationDespite the structural unifier of the GCC, there remains a series of important differentiators betweenthe economies that make up this union. The asset management firms that reported to theBarometer

described UAE, Saudi Arabia and Qatar as all poised to experience consistent growth in 2013. WhileKuwait and Bahrain were all tipped to emerge more slowly.Managers – who were still fully expectant of inflows stemming from the wider-MENA region, as wellas global investors – also described the flow of capital between GCC principals as stilted, despite theeconomic partnership.“Although we call it the GCC, when it comes to fund raising it isstill a strangely localised environment. Most domestic money ismanaged in the same country by local managers”NBKThe sound economic fundamentalsof the GCC will help it to consolidatethe safe-haven status it acquiredthrough the political dislocationcreated by the Arab Spring.According toBarometerrespondentsit has done particularly well fromwider MENA investment, with 85%of regional managers, citing inflowsfrom MENA countries outside theGCC. Participants in an Invesco studybelieved that the wider-MENA capitalflowing into the GCC – with a biastowards Saudi, UAE and Qatar, wasdriven by the factors in Fig 6.35REGIONAL OVERVIEWA handful of regional banks and distribution platforms sit outside this prevailing trend - HSBC, Citi,and Bank of America Merrill Lynch all have successful cross-border distribution networks and havebeen the true beneficiaries of the recent political uncertainty, because they are seen as safe havensfrom domestic strife.However, even relatively large regional players, like NCB Capital (NCB) and the National Bank of Kuwait(NBK), still derive the bulk of investment from a local base. Similarly, a number of sovereign wealth funds(SWFs) have slowed GCC-wide investment, in favour of more domestic infrastructure projects. Althoughthis strategy remains heavily dependent on the political status of each SWF’s home state, and is likely toreverse overtime, it has also been responsible for a slowing of cross-border GCC flows.Many independent and bank-owned fund managers who took part in theBarometersaw cross-border distribution in the GCC as key to their future development, albeit a trend that will develop slowly.Barometerrespondents said that a network of independent fund managers – many based in the UAEand Qatar – are best placed for the GCC and wider-MENA’s cross-border distribution opportunities.A number of large regional banks, with asset management units, expressed admiration for the fleetfooted independents in the Qatar Financial Centre (QFC) and Dubai International Financial Centre(DIFC) and a “business model that is predicated on independence and cross-border opportunities”.Bank-owned asset managers tend to have localised relationships because of historical ties andlocalised sales forces. Independent managers – a hedge fund or a small long only fund – with nimblemarketing teams are more capable of fostering cross-regional appeal. However, many still struggleto diversify because of regulatory impasse and because, realistically, they are only competing for2-3% of local money that will leave its home GCC state.For example, a large Saudi-based firm, like Samba, will easily have $3-4Bn in equities, based on its local retailrelationships. A small independent manager will have $50-150Mn per fund based on cross-border selling, whilea handful of genuine multinationals – like HSBC – are able to sell product at scale across the region.Despite the challenges, theBarometerfound that a number of GCC managers were eager tocapitalise on cross-border distribution potential by setting up secondary and tertiary GCC offices in2013. The UAE, Saudi Arabia and Qatar remained the most popular venues, while globally Singaporewas considered a top location for a new marketing hub, particularly with those offering Shariah-compliant vehicles.Location, location, locationAs the GCC grows, increasing numbers ofmanagers see it as serving the financial needsof the rest of MENA. Of those questioned almost70% spoke of establishing another regionalhub, while 60% of those surveyed already hada second presence within the GCC or wider-MENA. Many wanted to set up further afield.Of the 70% who discussed setting up in a newlocation, the UAE proved popular amongst 40% ofmanagers, Saudi 30% and Qatar 20%.The long-term future of intra-GCC flows are difficult to define, according toBarometerrespondents,although most saw asset flows between GCC states as a growing trend. However, others pointed outthat despite being designed as a free trade bloc, cross-border investment on both the retail side andinstitutional side is still comparatively low. These tensions mean it is more likely in the short term that GCCassets will flow outside of the region – an issue that local asset managers need to overcome.36Distribution opportunities

There are a number of distribution opportunities for fund managers. The UAE’s emerging independentfinancial advisor network was seen as a strong and influential presence – particularly among theexpat investor community.Managers responding to theBarometersaid that GCC-based financial advisors were also addingto an atmosphere of increasing risk tolerance and were capable of driving more investment into theequity product of managers.This emerging advisory network was expected to become the norm in a number of GCC hubs and would,according toBarometerrespondents, follow a developmental life-cycle that would see them move fromthe expat market to more local advisory work – particularly if a regional private pensions industry takes off.“Over the next few years the GCC investment advisory market islooking very interesting”InvescoBarometerresponse: The emerging GCC Independent Financial Adviser (IFA) market1. In the short-term, a growing IFA market would chiefly aid Western expats looking for investmentopportunities.2.Home market bias. A degree of domestic bias will see managers who cater to a particularnational demographic gain traction – for instance UK nationals will be interested in the offshoreproduct typically marketed in the UK3.Development of a non-European expat market. Many local banks have tapped into the non-resident Indian (NRI) market, as they cater to the investment needs of over six million Indiannationals living and working in the GCC. Increasingly this segment is being targeted by advisoryfirms who are hiring Indian nationals as advisors4.Penetrating the local market.Barometerrespondents were keen to see a GCC-wide ‘RetailDistribution Review’, that will encourage more cross-border retail investment and lead to an up-skilling and localisation of the intermediary marketWhile a meaningful independent advisory network hatches in the GCC, wider distribution opportunities arealso being created via the desire of large regional banks to extend reach and diversify product, with manycontemplating outsourcing asset management work, while amplifying internal distribution structures.Currently a number of large banks have ‘white-label’ relationships with local managers – for exampleRasmala and the Commercial Bank of Dubai – where the product of a third party is badged and distributedby a domestic bank. Managers and banks who spoke to theBarometerexpect these relationships to increase.

respondents believed concerns over market breadth, low liquidity, ownership structures and volatilityhave discouraged increased activity from large global investors.Direct outside investment into MENA remains focused on the main markets – UAE, Qatar and Saudi– over 40% of direct foreign investment has gone into the UAE, 19% in Qatar and 16% in Saudi Arabia,where investor access is more challenging (Fig 7).37REGIONAL OVERVIEWThe GCC will continue to represent an attractive market, although the potential for externalcapital to flow into domestic asset classes remains restricted by regulation. A further opening up ofGCC equity markets for foreign investors, combined with positive performance is potentially a majorcatalyst for the region.Fig 7: Direct foreign investment in equity markets 2011Source: World BankUAE $7.7BnBahrain $0.8BnKuwait $0.4BnOman $0.8BnQatar -$0.1BnSaudi $16.3BnEgypt -$0.5BnMorocco $2.5BnAll asset managers view the return of global investors into the market as a boost for regional indicesand a vital marker in the move from frontier to emerging market status. From a regulatory perspective,the bulk of local managers were keen to see GCC markets open up more, a change that wasunlikely to come about on a unilateral basis, but has seen some progress.A number ofBarometerrespondents spoke of renewed interest from US and European institutionalinvestors, with many talking about a significant equities mandate expected from Norway’s sovereignwealth fund and renewed activity from larger US pension and endowment funds.Managers who specialised in Shariah-compliant products were starting to see an uptick in interestfrom Asia and Australia, which both continue to increase demand for Islamic products.“We see a lot more investment coming from outside the Middle East –particularly North America, Europe and Asia. Pension and endowmentfunds will be looking outside local markets for growth returns”Abraaj CapitalBeyond the uncertainties in market conditions,Barometerrespondents said that global investorscould also be secured with more palatable structures and operational standards. Almost 30% oflocal fund managers employ offshore vehicles, while an increasing number expressed interest in thepotential of employing an Ucits, or other onshore, wrapper.Respondents cited performance as the key to capturing the interest of international allocators,but also suggested that operational excellence was similarly important. Industry best practice suchas the separation of custody, administration and brokerage from the asset management function isincreasing, with Bahrain-based firms setting the pace on this. Further, positive developments on thisfront will help the industry to grow and establish a stronger presence with Western investors, believedBarometerrespondents.“One of our prioritiesthis year is pensionsand endowmentfunds - institutionalmoney stays withyou for the longestamount of time”

Mashreq Capital38Fig 8: GCC stock market foreign ownership restrictions 2012STOCK MARKETUAENone for GCC citizensMax 49%UAE partner neededNone in DIFCBahrainNone10% ownership cap per investorKuwaitMax 49%5% ownership cap per investor for banksOmanMax 70%QatarMax 25%No participation in IPOsSaudi ArabiaMax 25% for GCC citizensNo direct participation in stock markets for non-GCCNon-GCC access via mutual funds, swaps and ETFsSource: DB ResearchPresently, direct investment by foreigners in Saudi listed companies is not permitted while in otherGCC countries it is restricted. Generally, the region’s capital markets regulatory framework wasperceived byBarometerrespondents to require further development. While the successful evolutionof comprehensive and active capital market regulation mechanisms, particularly in countries suchas Kuwait, Saudi Arabia and UAE, would have a positive impact on asset management businesses.The GCC remains attractive when it comes to corporate governance, as measured by the WorldBank’s governance index. Although as with all aspects of the region there are variations across stateswith well-defined financial hubs like Dubai and Qatar scoring higher than their neighbours.Managers responding to theBarometerwere also mindful of the pressures of international regulation,particularly capital adequacy rules, on the local banking system. Those who commented on regulationcited Basel III as having the most significant impact on the asset management units of large bankseither operating, or situated, in the region.A number of respondents described Basel III as potentially game changing. With banksconcentrating on preserving capital adequacy ratios it will be harder to gain longer term loans forproject finance and for business development goals and objectives.Other non-local regulation was also a source of concern. The region’s nascent hedge fund sector– which struggles in a region without clear cut and uniform derivatives or short selling rules – wasconcerned about the EU’s Alternative Investment Fund Managers Directive (AIFMD) initiative. Formore than one manager this was a vexation that was driven less by concerns around the punitivenature of the regulations and more around the lack of clarity.“Our concern with AIFMD is that it could lead to less investorchoice and more cost and so as implementation starts reallyin the middle of this year I think that AIFMD will be a majorchallenge”Goldman Sachs“The real challengeis going to bedealing with myriadregulation whichis not harmonisedand differs betweencountries in theregion”Saffar Holdings39REGIONAL OVERVIEWAlthough asset managers were concerned about more local regulation becoming a dead handon innovation, most saw change – particularly the recent Emirates Securities and CommoditiesAuthority (SCA) reforms and continuing developments within the QFC – as “very positive steps” and“crucial in creating a mutual funds industry that can be properly regulated across the GCC”.

Equities

Managers in the equities space, according toBarometerresponses, found last year’s conditionsfor asset-raising challenging. Flows across the board were still net positive, if sclerotic, particularlycompared to the pan-GCC popularity of money market funds.

Although a sea change in 2013 certainly isn’t expected there was an expectation that investorswould begin to consider a return to equities and equity vehicles – if managers could overcomescepticism about volatility and the diversity of regional stock markets (Fig 9).Fig 9: Top 10 equity funds in MENA by performance over 3 yearsFUND MANAGERFUND NAMESHARIAH-COMPLIANTFUND SIZE($Mn)1 YEAR

PERF (%)3 YEARS

PERF(%)END DATESHUAA CapitalQatar Gate Fund (N)4.0+5.0+ 55.7Dec-12SHUAA CapitalQatar Gate Fund (Q)4.6+4.9+ 52.9Dec-12Jadwa InvestmentJadwa GCC Equity Fund✔5.0+22.0+ 51.8Jan-13Jadwa InvestmentJadwa Saudi Equity Fund✔32.4+22.9+ 49.8Jan-13Saudi Fransi CapitalAl-Saffa Saudi Equity Trading Fund✔90.2+19.5+ 48.5Jan-13NCB CapitalAlAhli Saudi Mid-Cap Equity Fund✔17.6+16.0+ 46.2Jan-13HSBC Saudi Arabia LimitedHSBC Amanah GCC Equity Fund✔19.6+21.2+ 41.9Jan-13Riyad CapitalRiyad Small and Medium Cap Fund✔6.4+17.5+ 41.1Jan-13Riyad CapitalAmerican Stock Fund316.5+13.8+ 39.1Jan-13ANB InvestAl Arabi US Equity Fund6.8+18.1+ 38.0Dec-12Source: Zawya“Most are predicting a high-level return in equities, so that is a hugeopportunity particularly when we have seen investors underweightin equities. This is a key opportunity for the business”HSBCHowever, despite these nerves – amplified by political concerns – a number of GCC equityspecialists are confident that 2013 will see a significant rebound in the performance of local equitymarkets. A narrow band ofBarometerrespondents predicted a bull-run. A broader selection ofasset managers were actively reweighting portfolios towards equities or considering launching andmarketing new MENA and GCC focused equity vehicles.In recent history the GCC’s stock markets have followed a divergent path, with Dubai, Kuwaitand Bahrain still at only just over 50% of their index value immediately prior to the financial crisis.In contrast, Oman, Saudi and Abu Dhabi have staged a significant recovery and have reachedbetween 80-90% of pre-crisis index levels (Fig 10).40Last year gains may have been mixed, but crucially liquidity levels improved (Fig 11). While ageneral market sentiment of a return to growth has contributed to a growing confidence.Fig 10: GCC stock market performance2012 returnSaudi Arabia6%Kuwait4%Abu Dhabi10%Dubai21%Qatar-5%Oman1%Bahrain-6%Source: Regional stock exchangesLiquidity, or rather the lack of it, has been a major bugbear for asset managers trading the GCCmarkets. Some of this was assuaged in 2012 with a significant boost in trading levels, particularly in SaudiArabia – where traded value lifted to 77% in 2012. Traded value in the UAE was 25%, Kuwait grew by20% - Qatar dropped by 31%, while Bahrain remained static, recording a 2% rise. The majority of regionaltrading volume also exists at the Saudi exchange.Barometerrespondents claimed that many of the GCC’s listed entities are difficult to trade publiclybecause shares are concentrated in the hands of a small number of beneficial owners. The retail bias ofstock markets and the continued lack of institutional investors – circa 15% of all trading activity, comparedto 70% in Western markets – will also continue to make stock market performance uneven.Listings on the GCC stock exchanges tend to be concentrated in a small number of sectors, makingtrue portfolio diversification for asset managers trading local markets challenging. Even in the currentlybuoyant petrochemicals sectorBarometerrespondents complained that some of the best performingenergy companies – the Kuwait Oil Company and the Abu Dhabi National Oil Company – remain unlisted.The lack of diversity has been a barrier to institutional participation from pension funds, life insuranceand endowment funds and the types of investors who would traditionally support markets during choppyperiods. With the majority of local stock market participation from ‘hot’ retail money, there will remain atendency towards illiquidity and volatility for some time to come, despite the positive fundamentals.However, substantial improvements have been made and the situation is expected to continue toimprove via government spending and a healthier IPO pipeline. Sector composition is expected tobroaden, particularly in the almost absent tech space, where a number of MENA sovereign wealth fundsare currently trying to foster local expertise and infrastructure.Post-financial crisis there had been a slowing of fresh stock market IPOs. However, corporate advisorswho spoke to theBarometerexpected a small increase in 2013, while a number of asset managers whoare investing in and around the IPO space, are planning to launch MENA focussed IPO funds in thesecond half of 2013.“The IPO pipeline in 2013 is going to be better across the GCC asthere are definitely more firms looking for an exit”Abraaj Capital“Asset managersare hampered bylow liquidity andthe narrowness ofthe stock market– a detrimentto large foreigninstitutionalinvestors”

SHUAACapital41REGIONAL OVERVIEWWith asset managers expecting less volatility, better liquidity, a busier IPO pipeline and improved equityperformance, theBarometerfound that GCC equities were proving to be a particularly popular option amongmanagers who described the market fundamentals as looking attractive following a period of uncertainty.A large swathe of GCC-listed companies continue to perform well at relatively low P/E ratios,delivering valuation and return opportunities that are higher compared to the rest of the world.

Property, private equity and real assetsTheBarometer’s interviews revealed that property funds have enjoyed a recent surge in investorinterest and inflows. This renewed vigour is supported by a pick-up in deal flow and commercialproperty transactions in the GCC, with much of the activity focused on the UAE.According to the Dubai Land Department, property transactions grew by 21% to $17Bn in the 1Hof 2012, with $7.7Bn of this stemming from direct foreign investment. This easing of the UAE’s propertyslump has been inspired by the global lift in commercial property prices, but also by local uncertaintydriving cash into the GCC. Saudi mortgage law, with its intention to double the Kingdom’s housingstock, could also contribute to the resurgence of property vehicles.In fact, managers who took part in theBarometersaid that political uncertainty and volatilitycontinued to push up interest in tangible and real assets across the board, with many planning tomarket existing property funds or launch new private equity ventures (Fig 11).Fig 11: Largest MENA-focused private equity fundsFUND NAME GEOGRAPHIC FOCUS FUND SIZE ($)Abraaj Buyout Fund IV MENA 2.6BnSouth AsiaIDB Infrastructure Fund II Africa 2.0BnAsiaMiddle EastSouth AsiaUnited StatesInfrastructure and Growth Capital Fund MENA 2.0BnGulf Opportunity Fund I GCC 1.1BnMENAIthmar Fund III GCC 1.0BnIDB Infrastructure Fund L.P.MENA 980.0MnSwicorp Joussour Fund GCC 712.0MnADCB Macquarie Infrastructure Fund GCC 630.0MnMENAGlobal Buyout Fund L.P.China 615.0MnIndiaMENAPakistanTurkeyICD Food & Agribusiness Fund MENA 600.0MnSource: Zawya“One of the thingsthat we’ve pickedup is a real interestin high yieldingassets globally andalso real assets.The themes for thisyear will be aroundyield in general,but will also bearound real estateand infrastructureinvestment”Invesco42Niche opportunities and single deal transactions, often with local co-investors, are currently themain driver of the region’s private equity business. Many of the private equity players spoken to bytheBarometerwere tracking the direction of sovereign wealth money, as they looked to benefit fromgovernment investment in opportunities like local infrastructure, education and healthcare.Barometerrespondents were also drawn to the value proposition of many GCC and MENAbusinesses, describing them as “undervalued entities, generating great cash-flows and with cogentexpansion plans”. While in the past many of these businesses would tap the regulated banking sectorfor funding, a number were now considering private equity backers.“There are a number of select private equity opportunities for uswith small to medium sized enterprises providing seed or venturecapital”Saffar CapitalAccording toBarometerrespondents although some private equity inflows will stem from regionalbanks and global invstors, as with other investment vehicles the majority of investment will comefrom families and private money, looking to diversify away from core businesses and holdings.Barometerrespondents said that local investors were actively searching for niche opportunities, asthey attempted to decrease volatility and search for better yield.One leading regional private equity player said: “HNWIs want to allocate money to non-corerelated businesses, not listed on public exchanges. The parties that we think are interesting are mid-cap domestic demand driven businesses, such as education or healthcare, or food retailing – theseare all areas that we are focusing on.”In fact most regional private equity players who responded to theBarometerwere currentlyfocused on domestic businesses particularly those unlikely to fall victim to economic cycles, Eurozoneand US pressures or the vagaries of the Arab Spring.And while managers trading in securities and fixed income were reluctant to invest in countriesrecently impacted by political change, private equity players were a little more bullish. Egypt wasdeemed to hold enormous potential, although most players were keeping their powder dry until afterthe country’s April 2013 elections.However, despite the opportunities for niche deals, there was some concern that private equityplayers would struggle to raise assets, with investors still nervous about illiquidity and tying up moneyfor elongated time horizons, particularly given ongoing uncertainty in wider-MENA.

Fixed income – emerging asset class, bolstered by the need forShariah-compliant investmentFixed income remains a relatively undeveloped area in the GCC and wider-MENA. However, Bahrain,Qatar and the UAE have seen the development of increasingly bustling bond markets, which, overthe last year, have continued to see an increase in investor activity and fresh debt issuances.The use of Islamic debt instruments is also expanding – leading to more sukuk-style products, whichare picking up traction from global and local investors (Fig 12) seeking low-risk returns from Shariah-compliant fund vehicles.43REGIONAL OVERVIEWFig 12: Top 10 fixed income funds in MENA by performance over 3 yearsFUND MANAGERFUND NAMESHARIAH-COMPLIANTFUND SIZE($Mn)1 YEARPERF (%)3 YEARSPERF (%)ENDDATEMashreqbankMakaseb Income Fund40.7+ 18.0+ 36.6Dec-12CI Asset ManagementCommercial International Bank Fund964.9+ 11.6+ 31.4Jan-13Commercial Bank of DubaiAl Dana Global Fixed IncomeManager Selection Fund8.6+ 8.6+ 23.4Mar-11National Bank of Abu DhabiNBAD Global Debt Securities Fund1.7+ 4.1+ 16.7Dec-12Riyad CapitalUS Dollar Bond Fund0.02+ 2.7+ 15.1Dec-12ANB InvestAl Arabi Global Bond Fund5.9+ 4.7+ 14.1Dec-12Blominvest BankBlom Bond Fund334.3+ 2.7+ 12.7Dec-12BMCE Capital GestionFCP Capital Imtiyaz Liquidite175.7+ 3.9+ 12.6Dec-12Valoris ManagementEmergence Fund264.3+ 3.2+ 12.2Dec-12Valoris ManagementEmergence Bond Fund370.3+ 3.8+ 12.2Dec-12Source: ZawyaLocal fixed income should remain a popular asset class in 2013, despite a renewed interest in equities.Global differentials in yield will continue to drive investment in local sovereign debt, where returns arestill considered attractive on a risk return basis, compared to US-denominated yields (Fig 13).Asset managers reporting to theBarometeralso described the likely continuation of a trend thathas seen local allocators become more comfortable with the concept of debt as a diversifier and asa method to reduce equity related volatility in their portfolios.Fig 13: Interest rates for US/Qatar government bonds and UAE bondsMaturityYieldUS20170.18%Qatar20172.50%DP World20175.00%Dubai Holding201710.10%Source: InvescoAt $23.7Bn – in H1 2012, the value of sovereign, corporate and sukuk bonds was 54% higher thanthe same period in 2011 – pointing to a growing maturity of debt markets, particularly in the corporatesector, where $38Bn worth of MENA bonds will mature in 2013.Just like the region’s larger equity space, debt issuance exhibits a strong geographical and sectorbias. According to data form Deutsche Bank a major share of outstanding GCC debt stems fromthe UAE, while Qatar and Saudi account for 24% and 16% of the market share, respectively (data asH1/12). In wider-MENA, Egypt and Morocco both have small but relatively mature debt markets, with$150Mn and $123Mn of issuances respectively in January 2013.Clearly, this is still an underdeveloped sector. At the end of 2010 public and private debts marketsin the GCC represented just 17% of GDP – showing tremendous room for growth. Equity marketsremain more mature, the value of which roughly equates to 75% of GDP.The opportunity of an under-penetrated market is obvious, however,Barometerrespondents also“We expect good growthopportunities in the fixed incomemarkets led by new issuances fromboth sovereigns and corporations”

Securities and Investment Company44described the lure of higher equity returns, and the beginning of a risk-on environment, potentiallyovershadowing the nascent bond market in 2013. Others disagreed saying fixed income wouldcontinue to represent a growing force in the GCC, with more Shariah-compliant vehicles and agrowing complexity in product.If there is a tailing off in conventional fixed income products, managers expect to journey up theyield curve with more esoteric vehicles. One of the areas of interest reported by both buy-side andsell-side managers was the senior secured product – the credit of banks, offering a high yield – oflocal banks.Sukuk debt instruments continue to breathe serious life into the GCC’s fixed income space.Barometerrespondents said that one of the most highly anticipated pieces of legislation in 2013 willbe Egypt’s introduction of sukuk regulation, a rule change that is perceived as a genuine opportunityacross the MENA investor set.Shariah-compliant

A growing number of asset management products – across all asset classes – are Shariah-compliant.In fact Shariah assets now account for 66% of the AuM in GCC funds and 37% in MENA (Fig 5 and 14).“There is a lot of opportunity in two key areas: growth of Islamicfinance and growth of Islamic institutions”United Securities

Fig 14: Country breakdown of Shariah and conventional assetsConventional

funds ($Mn)Number

of fundsShariah funds

($Mn)Number

of fundsTotal AuM($Mn)Total %ShariahBahrain1159.731160.191319.712%Kuwait3010.1261177.2234187.328%Oman510.7120.01510.70%Qatar81.2775.34156.548%Saudi Arabia4680.17918802.214823482.380%UAE1039.128244.2101283.419%Egypt9791.872126.8129918.61%Morocco14779.817316.8214796.60%Source: ZawyaManagers who responded to theBarometersaw significant opportunities in the growth of Islamicfinance as way to extend investor reach and levels of AuM. Primarily these new investors could besourced from within the GCC, particularly from the region’s emerging pension funds industry andretail investors. Respondents also reported a second wave of interest stemming from the wider-Islamic world, particularly Asia.

45REGIONAL OVERVIEWFund management – after a series of setbacks, MENA’s fundmanagement sector could benefit from greater diversification andpositive equity markets in 2013Collective investment schemes across MENA remain at a relatively early stage of development,particularly compared to the institutional heft of sovereign wealth funds and family offices.However, the proliferation of these products continues, despite the recent market volatility andslowing of inflows. Mutual funds, according toBarometerrespondents, are seen as providing someof the region’s most interesting investment strategies, while the growing popularity of Shariah-compliant collective investments schemes continues to provide growth opportunities, particularlywhen combined with changing financial regulation across the GCC and wider-MENA.Independently managed funds are also seen as potentially the best method for harnessing theinvestment of global institutions, that are either prevented from direct investment or prefer themediation of third-party managers.Barometerrespondents said that the region’s mutual funds were predisposed to invest in a wider numberof asset classes than other investors. This approach, once it reaches scale and maturity (Fig 15 and 16), willprovide an increase in liquidity and also a diversification service for the region’s other asset managers.Collective investment schemes were also responsible for the bulk of intra-GCC flows, contributing to agrowing culture of cross-border investment activity.“There’s a lot of liquidity and a lot of money that needs to beinvested and investors in the region are becoming more interestedin holding a diversified basket of investments”Mayar Capital ManagementFig 15: Top 10 funds in MENA by performance over 3 yearsFUND MANAGERFUND NAMESHARIAHSIZE ($Mn)1 YEARPERF (%)3 YEARSPERF (%)END DATEFalcom Financial ServicesFalcom IPO Fund✔4.0+ 60.7+ 114.3Jan-13KSB Capital GroupKSB IPO Fund✔6.4+ 21.5+ 68.9Dec-12Bakheet Investment GroupBakheet IPO Fund24.9+ 29.7+ 63.1Jan-13SHUAA CapitalQatar Gate Fund (N)4.1+ 5.0+ 55.7Dec-12SHUAA CapitalQatar Gate Fund (Q)4.6+ 4.9+ 53.0Dec-12Jadwa InvestmentJadwa GCC Equity Fund✔5.0+ 22.0+ 51.8Jan-13Jadwa InvestmentJadwa Saudi Equity Fund✔32.4+ 22.9+ 49.8Jan-13Saudi Fransi CapitalAl-Saffa Saudi Equity Trading Fund✔90.2+ 19.5+ 48.5Jan-13NCB CapitalAlAhli Saudi Mid-Cap Equity Fund✔17.6+ 17.6+ 46.3Jan-13NCB CapitalAlAhli Global Real Estate Fund✔13.3+ 17.9+ 45.8Jan-13

Source: Zawya46Fig 16: MENA fund management universe 2012Source: Zawya, Mena FMTotal MENA AUM$55.6BnTotal number of MENAmanagementcompanies137Total number ofMENA funds 637Total GCC AUM$30.9BnTotal number ofGCC managementcompanies101Total numberof GCC funds378Although equity funds account for the greatest number of fund vehicles across MENA, the totalassets held in these vehicles only hovers at around 40% across the GCC (Fig 17) and only 25% acrossMENA (Fig 18). Money market instruments remain the dominant force in terms of total AuM, possessing49% of AuM in the GCC and 55% of total industry assets across MENA.With asset gathering a priority, many managers saw the potential of bank distribution deals, wherespecialist product from independent managers, would be white labelled by regional banks. Thisprovides a major opportunity for asset management firms, who would receive a much neededcapital injection via reaching a deal with a regional bank. In return banks are searching for greaterproduct diversification.Fig 17: Breakdown of GCC fund